What’s Tesla’s secret?

Despite being the youngest and smallest car manufacturer in the US, Tesla is currently valued at more than General Motors and Fiat. What sets the company apart from the rest?

Tesla Motors CEO Elon Musk is the man at the helm of the youngest car manufacturer in the US. Considered a visionary entrepreneur, the South-African born businessman also founded PayPal 

Tesla Motors is a Palo Alto, California-based automobile manufacturer, a 10-year-old start-up that only rang up its first profit in the first quarter of last year. Its total array of models comes to just two, with two more in the offing, and 2014 sales are projected at a modest 35,000 units. Indeed, the company is the smallest and youngest manufacturer of publicly-used vehicles in the US.

Yet in February, Tesla’s market capitalisation leapt briefly to $31bn and it hovers consistently around the $25bn mark. As analysts point out, at that price the automobile manufacturer is valued at more than one third of General Motors and twice that of Fiat, which is slowly absorbing Chrysler.

What’s Tesla’s secret? It’s the pin-up boy of electric cars, the brave new world of the automobile manufacturing industry, as it reinvents itself after some 130 years of the internal combustion engine. Tesla’s flagship vehicle, the racy-looking Model S, has a basic sticker price of $63,000 (£50,000) including a $7,500 federal tax credit, and is coveted by wealthy greenies.

Although hardly a global manufacturer, the Model S went on sale in Europe in mid-2013 and will be launched in China in 2014. Nobody seems to mind that one of Tesla’s cars caught fire late last year.

Battery powered
Yet it’s not so much the car but the technology that has pushed Tesla’s valuation into top gear. When analysts from Morgan Stanley judged in late February that the company was as much a manufacturer of next-generation batteries as a producer of high-powered automobiles, its stock jumped 14 percent overnight on the Nasdaq.

It’s the pin-up boy of electric cars, the brave new world of the automobile manufacturing industry

The trigger for the take-off in the share price was the announcement by Tesla’s founder and Chief Executive, Elon Musk, of plans to build a ‘gigafactory’ designated simply as ‘+’ for making lithium-ion batteries. Not only does he intend to disrupt the global automobile industry, this South African-born visionary entrepreneur – he also founded PayPal – is aiming for a big slice of the electric utility industry as well.

Such is investor interest in green power that a few days after the announcement Tesla raised $2bn in convertible bonds, the biggest such sale in the US in over two years. Bond buyers are betting on a bright future for the automobile/battery manufacturer – instead of banking just a stream of interest as with standard corporate bonds, they will be able to convert the paper to shares at a trigger price.

Changing attitudes
Suddenly, after years of doubt and derision, electric cars are seen as the future. Although they could only putter about, those funny little box-shaped, plug-in vehicles driven by earnest, elderly greenies really were the pioneers of a new age of automobiles.

“The time is right for electric cars – in fact the time is critical”, argues Carlos Ghosn, Chief Executive of Renault-Nissan, who has gone out on a limb with electric technology, notably with its Leaf model.

Tesla car sales revenue





It’s statements like these that are making electric cars cool. Certainly, nobody sees anything strange in Google embracing battery-powered cars – officially known as EVs – by buying up hybrids and converting them into plug-ins so it can see whether its engineers can do better.

The company is reportedly investing heavily in its own driver-less cars. And Apple, which was rumoured last year to be considering a buy-out of Tesla, is said to be working on its own EV. When – or if – it unveils an iAuto, it would surely make a much bigger splash than a new version of the iPhone or iPad.

The giants of the historic industry are fighting back. The Renault-Nissan partnership has a formidable line-up of electric cars, albeit of three-star appeal. And in late 2013, BMW went up-market with the launch of the i3, a compact that has been an instant success. According to the Munich-based manufacturer, its assembly lines cannot keep up with demand even at a starting price of £25,680.

Other manufacturers are waiting on the sidelines, nervously watching sales figures for their rivals’ electric cars. The holdouts, such as Fiat, are unsure which way the market will run. Some – like Toyota with its Prius and Lexus – are covering their bets by putting faith in hybrids: semi-electrics boosted by small engines.

Of these, the most recent version is the Cadillac ELR, General Motors’ first top-drawer electric automobile that entered showrooms just before Christmas 2013. The ELR is a premium version of the Chevy Volt with much the same form of propulsion – a T-shaped, 288-cell, 16.5-kWH lithium-ion battery pack allied to a 1.4 litre Ecotec four-cylinder engine.

The base price of $75,000 could prove a stumbling block though. According to the website Green Car Reports, a straw survey of potential buyers was not promising. “The common reaction when we revealed the $82,000 sticker price of our test car was stunned silence,” the site reported.

A fully-electric Tesla car on an assembly line at a Tesla Motors factory in Tilburg, Netherlands
A fully-electric Tesla car on an assembly line at a Tesla Motors factory in Tilburg, Netherlands

But Mercedes-Benz believes the money’s out there. Its B-class all-electric car will come on to the market at an estimated European price of about €30,000 (£25,000). With a range of 115 miles, it’s another premium model that is a giant leap forward from the battery-powered tin cans of yesteryear.

Even the supercar industry is joining the trend. Jaguar’s C-X75 – a 900bhp 2010 concept vehicle – was a marvel of technology that employed two diesel-driven micro-turbines to charge the batteries. These in turn drove four electric motors distributed between the wheel hubs. The Mark II version currently in the works is driven by a 1.6-litre engine mated to a pair of electric motors and a lithium-ion battery pack.

Power shift
The implications for the world of motoring are transformational. Historically traditional manufacturers dominated the automobile industry because they had a monopoly on the development of the internal combustion engine – and they still have. But now that the propulsion derives from the stuff that drives electronic devices, the balance of power has shifted to new industries. Though electric vehicles have been slow to catch on, analysts believe the market turned the corner last year.

In January, Navigant Research, a specialist in green technology, predicted that by 2022, there would be more than 35 million EVs on roads worldwide. And that’s almost from a standing start.

Apple, which was rumoured last year to be considering a buy-out of Tesla, is said to be working on its own EV

It was Tesla that shook up the industry. In 2007, General Motors’ then-vice chairman Robert Lutz, a legendary figure in automobiles, saw the light. After taking a long hard look at a Tesla Roadster, the company’s debut model, Lutz put General Motors to work on the Volt, a plug-in hybrid sedan.

He told The New Yorker: “All the geniuses here at General Motors kept saying lithium-ion technology is 10 years away, and Toyota agreed with us – and boom, along comes Tesla. So I said, ‘How come some tiny little California startup, run by guys who know nothing about the car business, can do this, and we can’t?’ That was the crowbar that helped break up the log jam.”

Although an enclosed, silent battery power unit may lack the drama of a gleaming, rumbling petrol-driven engine, the science behind electric cars is immense. Huge advances had to be made to get where we are now. Tesla has gone its own way by packing its lithium-ion batteries with thousands of what are known as 18650 commodity cells, roughly the same as those found in laptops and other mobile electronic devices, while other manufacturers have gone for larger single-purpose cells.

Elon Musk named his cars after the great Nikola Tesla, the electrical engineer, physicist and futurist who designed an electrical motor as long ago as 1882.

To get around the hefty weight of the current generation of batteries, Tesla spent a decade working with its battery supplier Panasonic, a major investor, on producing cells that are lighter and cheaper. The result is that the company probably has the edge in costs – it is estimated that Tesla prices its batteries at $200 per kWh.

The California company has also got a jump on the opposition in another crucial issue: the location of the space-hungry power unit. In the Model S, Tesla has buried the battery in the floor instead of in the normal place behind the seats or in the boot. Finally, there was the challenge of making electric cars run further than around the block before they ran out of charge. The Tesla Roadster was the first electric vehicle with a range greater than 200 miles (320 km).

But where do you charge it up? Tesla is busy creating its own chain of Supercharger stations. With 65 in the US and just 14 in Europe, it has a long way to go.

The next big thing
On the way to a brave new world of EVs, there have been casualties. Israeli start-up Better Place, a company that banked its future on battery-swapping rather than recharging stations, collapsed in 2013 after burning up $850m in private capital. And Fisker Automotive, a 2007 partnership between former Aston Martin and BMW designer Henrik Fisker and German industrialist Bernhard Koehler, also declared bankruptcy in late 2013 but was bought in early 2014 by China’s auto parts conglomerate Wanxiang Group.

The next big thing could be hydrogen-powered cars. Nissan and GM, among others, are already pushing along this route

Another brave new world is coming in the automobile industry and it’s in ‘connected’ cars. That is, connected to everything. Apple has just embedded a proprietary in-car operating system in a new wage of models produced by Ferrari, Mercedes-Benz and Volvo.

This is much bigger than mere ‘always-on’ communication technology. The grand plan is to install software and related engineering that will ultimately enable automobiles to drive themselves. Germany’s tyre giant Continental has high ambitions for its own similar technology.

Britain’s Jaguar-Landrover group could be ahead of the game here. The latest Landrover will automatically turn the steering wheel and apply the brakes if the software thinks the driver is getting too close to adjacent vehicles or immovable objects.

The next big thing could be hydrogen-powered cars. Nissan and GM, among others, are already pushing along this route and the first production models are due out in 2015 or soon afterwards. A big handicap of hydrogen power, though, is that charging stations are few and far between, even in the US, which is the flag-bearer for these EV alternatives. And, fanciful though it sounds, automobile manufacturers are experimenting with ways of using the family car as a kind of generator.

Last year, Ford announced a partnership with SunPower and Whirlpool that aimed to show how EVs can be hooked into the domestic power supply in a way that reduces electricity bills.

But right now the main challenge is to make EVs more affordable. With the help of his new factory, Elon Musk believes the company can develop a luxury model that will sell for around $35,000, less than half the price of today’s $72,000 basic model. At that point the internal combustion engine could be destined for the scrap heap.